e project manager at an investment firm and giv

College Accounting, Chapters 1-27
23rd Edition
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:HEINTZ, James A.
Chapter5: Adjusting Entries And The Work Sheet
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Problem 1MC: LO1 The purpose of depreciation is to (a) spread the cost of an asset over its useful life. (b) show...
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Imagine you are the project manager at an investment firm and given the task of preparing a report (essay) addressing several companies' projects' evaluations. Use the supplied information for each project to answer the associated questions. Your deliverable is a professionally prepared MS Excel file, MS Word report (essay) applying APA 7 formatting and a quick information sheet. In your recommendation/conclusion of your report identify the best project to invest in and give reasons why. The quick information sheet is this document with the blanks filled out for each question area.

 

Project 1

Callaloo Collaborators, Inc. has been considering several capital investment proposals for the year beginning in 2019. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. New assets will be depreciated under the MACRS system rather than being fully expensed right away. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.

 

Table 1.

Callaloo Collaborators, Inc. Project Information

______________________________________________________________________

*Not applicable

 

Project 1 Questions:

 

1) For Proposal 1, the cash flow pattern for the expansion project is ________.

2) For Proposal 1, the initial outlay equals ________.

3) For Proposal 1, the depreciation expense for year 1 is ________.

4) For Proposal 1, the annual incremental after-tax cash flow from operations for year 1 is ________.

5) For Proposal 2, the cash flow pattern for the replacement project is ________.

6) For Proposal 2, the book value of the existing asset at the end of the fifth year is ________.

7) For Proposal 2, the tax effect on the sale of the existing asset at the end of the fifth year results in ________.

8) For Proposal 2, the initial outlay equals ________.

9) For Proposal 2, the incremental depreciation expense for year 2 is ________.

10) For Proposal 2, the annual incremental after-tax cash flow from operations for year 2 is ________.

11) For Proposal 3, the cash flow pattern for the replacement project is ________.

12) For Proposal 3, the book value of the existing asset is ________.

13) For Proposal 3, the tax effect on the sale of the existing asset results in ________.

14) For Proposal 3, the initial outlay equals ________.

15) For Proposal 3, the incremental depreciation expense for year 3 is ________.

16) For Proposal 3, the incremental depreciation expense for year 6 is ________.

17) For Proposal 3, the annual incremental after-tax cash flow from operations for year 3 is ________.

 

Proposal
Type of Capital
Budgeting Decision
1
Expansion
Replacement
Mutually
Replacement
Mutually
Exclusive
Exclusive
Type of Project
Cost of new asset
Independent
$1,500,000
with 3
with 2
$200,000
$300,000
$15,000
Installation costs
$0
$0
MACRS (new asset)
Original cost of old asset
Purchase date (old asset)
Sale proceeds (old asset)
MACRS (old asset)
Annual net profits before
depreciation & taxes (old)
Annual net profits before
depreciation & taxes (new) $250,000
10 years
5 years
$80,000
5 years
$100,000
N/A*
N/A
1/1/2010
1/1/2013
N/A
$50,000
$120,000
N/A
5 years
5 years
N/A
$30,000
$25,000
$100,000
$175,000
Transcribed Image Text:Proposal Type of Capital Budgeting Decision 1 Expansion Replacement Mutually Replacement Mutually Exclusive Exclusive Type of Project Cost of new asset Independent $1,500,000 with 3 with 2 $200,000 $300,000 $15,000 Installation costs $0 $0 MACRS (new asset) Original cost of old asset Purchase date (old asset) Sale proceeds (old asset) MACRS (old asset) Annual net profits before depreciation & taxes (old) Annual net profits before depreciation & taxes (new) $250,000 10 years 5 years $80,000 5 years $100,000 N/A* N/A 1/1/2010 1/1/2013 N/A $50,000 $120,000 N/A 5 years 5 years N/A $30,000 $25,000 $100,000 $175,000
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